Disinfecting Consumer Arbitration

Elizabeth Warren already posted on the Consumer Arbitration Fairness Act (H.R. 3010 in the U.S. House and S. 1782 in the U.S. Senate). In addition to the Christian Science Monitor story about the abuses that helped to motivate this bill, see here for a Credit Slips story from one former arbitrator about his experiences. This new bill would do nothing less than end mandatory arbitration in consumer transactions. Warren's post explains why consumers should care about this legislation, and I won't add to that. Rather, I wanted to add some different thoughts.

Stacking the Deck

Senator Russ Feingold and Representative Hank Johnson have introduced legislation to stop the fine-print, mandatory arbitration clauses that show up in millions of credit card agreements.  Once a dispute arises, if both parties want to go to arbitration, that's fine. But the company cannot hide an arbitration clause deep in the fine print of the credit card agreement, then require arbitration when they want to squeeze a customer for money the customer says she doesn't owe.

Why is this such a big deal? Arbitration sounds like a cheap, fair way to settle disputes. But a study from the Christian Science Monitor shows another reason: the arbitrators are beholden to the repeat players (credit card companies) that pay their fees. The top ten arbitrators ruled for the customers just 1.6% of the time, while arbitrators who weren't depending on arbitration fees (those who decided 3 or fewer cases a year) ruled for the customers 38% of the time.

A “Small” Exception in Credit Card Arbitration Clauses

The other day I took out a store credit card at a department store.  I wasn’t happy about it, but it was one of those stores that does not take Visa or MasterCard, and I had planned on paying for my purchase with a debit card.  I read the contract, even though the sales person rang up my purchase before handing it to me.  (I admit that I take an academic interest in even my own credit transactions.)  I was not surprised to find that the contract featured a binding arbitration clause, but I was impressed to see that this clause included an exception for consumer actions in small claims court.  Specifically, the issuer agreed not to invoke its right to arbitration if the customer sued it in small claims court. 

Bloodsuckers, Godless, or Both?

In "Arbitration and the Godless Bloodsuckers," Richard Neely relates his experience as an arbitrator for the National Arbitration Forum:

[T]he bank asks for substantial costs related to the arbitration itself, and those costs are significantly higher than court filing fees. . . . In one case that I handled, the fees alone amounted to $450. Furthermore, the arbitration company sends the arbitrator a judgment form already filled out so that all the arbitrator need do is check the appropriate box. . . .
   In my case I did not award the bank the litigation-related fees. . . . I never got another case!

In addition to writing this article, Richard Neely also happens to be a retired chief justice of the West Virginia Supreme Court. Katie Porter had previously posted about arbitration actions in credit card collection. The National Arbitration Forum seems a particular concern and appears to be nothing but a huge debt collection operation. Mr. Neely's comments are illuminating about the NAF's business practices. The article is a quick read (only two pages long) and appears in the September/October issue of the West Virginia Lawyer, which is available online here. (Note to readers: it is a huge file (9 Mb). Note to West Virginia Bar Association: thanks for making this content available online, but there are ways to do it without making a huge file.)